Saturday, September 15, 2012

The stock prices of PPB and its 18.3% owend associate Wilmar Intl have
plummeted over the past three months (June 2012 – Aug 2012) to their
lowest in three years but market observers are wondering whether the worst is
over.

Meanwhile PPB Group Bhd believes the business model of its 18.3% owned Wilmar
International is sound and expects the latter's financial
performance to improve once market conditions turn around.Wilmar had four years of good earnings. It has been in the
commodities business for long time, and have the experience to address and
mitigate uncertainties.

PPB’s Prospects …

PPB is the largest
oil palm processor and has 50% share of branded consumer cooking oil market.
The Chinese government in Aug 2012 reportedly asked companies like Wilmar not
to raise cooking oil prices unless it was absolutely necessary to keep a lid on
infiation.

There are no immediate catalysts and operating conditions continue to
be challenging (Aug 2012).

Over 70% of its
earnings come from Wilmar.

PPB’s
environmental engineering business has rm120 million
worth of water and sewerage related jobs on its books and is eyeing similar
contracts coming up soon such as the Langat 2 project in Selangor presents rm8
billion worth of possibilities.

Its GSC is no
longer pursuing expansion in China
but is exploring the possibility of entering Vietnam
and Indonesia
. Some rm95 million has been set aside to open seven more cinemas over the next
two years in Malaysia
.

Its Massimo bread business
is already profitable and FFM is setting aside rm40
million to expand the breadmaking capacity.

The group budgeted
RM467mil for capital commitments from 2012 till 2014 for
its grains trading, flour and feed milling segment (RM342mil), film, exhibition
and distribution (RM106mil) as well as property investment and development.

It reported a net profit of rm108.42 million for its second quarter
ended June 2012 which was a fall of 60.8% year on year. The company said this
was mainly due to the lower profit contribution from Wilmar.

There is not enough confidence instilled among investors that Wilmar
will improve in the short term, and see challenges ahead.

Weak CPO prices are likely to persist in the medium term and
recommended investors to exit Wilmar and IOI Corp.

Wilmar’s Prospects …

After years of rapid expansion through acquisitions as well as organic
growth, it is now (Sept 2012) a much larger and more complex corporate group
than before, making it more difficult than ever to forecast the margins it
makes on trading and processing commodities. Rising costs and intensifying
competition have not helped either. In fact, WIlmar has now (Sept 2012) fallen
short of the market’s earnings forecasts for four consecutive quarters.

Food price inflation
has also been a growing source of concern for governments of large population
nations such as China ,
which Wilmar counts among its key growth markets. That has increased the odds
of the company’s being hit by bouts of price controls and other forms of
regulatory intervention, and spells greater uncertainty for shareholders of
Wilmar.

Despite its slumping market value (Sept 2012), Wilmar is still a palm
oil juggernaut with massive scale. It reports its operating profits by five
major divisions. The major division is palm and laurics, which processes palm
and lauric oils into refined oils, specialty fats, oleochemicals and biodiesel
distributing these products through a network that covers more than 50
countries.

It owns processing plants in major palm oil producing countries such as
Indonesia and
Malaysia as well as in consuming markets such as
China , Europe and
Vietnam .
In FY2011, merchandizing
and processing of palm and laurics accounted for 30% of pre tax profits.

The second largest of its divisions, contributing 25% to pre-tax
profits is plantaions and palm oil mills. As at end Dec 2011, roughly 74% of
Wilmar’s 247081ha of planted area was located in
Indonesia with another 24% in East Malaysia and
2% in Africa . Wilmar also owns plantations in
Uganda and West Africa
through JV.

Wilmar also has a sizeable business in oilseeds and grains. This
divisions has grown significant accounting for 2% of pre tax profits in FY2011.
In China ,
Wilmar is a leading oilseeds crusher.

Wilmar also one of the largest rice and wheat millers in
China .

In 2010, Wilmar expanded into the sugar business through the
acquisition of Sucrogen, one of the world’s largest raw material
producers and a leading sugar refiner in
Indonesia . In July 2011, it
acquired one of eight licensed sugar refineries in
Indonesia . In Dec 2011, it also
acquired another sugar mills.

Wilmar now has a sugar business that accounted for 2% of pre tax
profits in FY2011.

Finally, the smaller division with 4% of pre tax profits is the
consumer products division which produces and sells consumer packs of edible
oils, rice, flour and grain marketed under its own brands.

Its 2QFY2012’s earnings …

A chunk of Wilmar’s earnings miss in 2Q2012 came from the palm
and lauric segment.

Also its plantation divisions also turned in weak numbers in 2Q2012.

Meanwhile its consumer pack edible oil business continues to worry. To
curb inflation, the Chinese government has been holding talks with the
country’s major edible oil producers to ensure price stability.

It is also continuing to see red link at its oilseeds and grains
division which reported a second consecutive quarter pre tax losses in 2Q2012
owing to a negative crush margins and a weaker renminbo. Crush margins were the
worst in 10 years, as the industry is currently suffering from excess capacity.
Wilmar is likely to be affected by a global shortage of soybeans that has
resulted in a spike in soybeans that has resulted in a spike in soybean prices.

Another area of concern has been Wilmar’s sugar milling business
where pre tax losses widened in 2Q2012 because of wet weather in
Australia .

Is this an opportunity for investors?

Kuok himself warns that Wilmar’s businesses in
China face challenging conditions.
The excess capacity in oilseed crushing will also continue to affect
profitability in that division, while a possible further weakening of the
renminbi against the US dollar would be negative for the company. Yet he insists the long term prospects for the
oilseed and consumer products businesses remain promising because of growing
demand in markets such as China .
And Wilmar is working to improve the profitability of its various divisions.

Oilseed crushing business is an important part of its integrated
business in model in China .
Oilseed crushing margins in China
will have the most impact on FY2012 results.

There is a chance that Wilmar will be able to buy subsidies soybean
from the Chinese government in 2H2012 this easing cost pressures.
China
has strategic soybean reserves.

Even if WIlmar’s earnings growth recovers in the quarters ahead
(Sept 2012 & Beyond), will it be just a matter of time before its commodity
trading or processing margins suffer another squeeze. What if
China clamps down on selling prices
of staple food again?

The fact is that
there is no other company quite like Wilmar. It is one of the largest producers
of palm oil and sugar in the world. It has 50% share of
China ’s cooking oil market.
In Australia
and NZ its refined sugar products represent more than 60% of volume sale across
the retail, food service and F&B ingredient markets.

While its profit margins have been under pressure, the company does not
appear to be ceding any market share.

Wilmar remains a conduit for
Asia ’s food supply. The company business model as
an integrated supply chain manager remains intact. It has continued to see
steady market share gains and volume growth for its key divisions. So while its shares might have suffered a setback in
face of lower profitability, the company still operates a crucial and growing
business with some of the bigger consuming nations of the future as its key
market.

Whatever the case, Wilmar seems more interested in buying back its
stock than issuing more shares.